Court pares back Tim Hortons franchisee lawsuit against parent company

Rebellious Tim Hortons franchisees have been dealt a setback in their legal feuds with the chain’s parent company over restaurant costs and the right to associate.

An Ontario Superior Court judge has struck out many of the claims that franchisees had made in two separate legal actions in which they are seeking class-action status against the coffee-and-baked-goods chain.

Justice Edward Morgan threatened to throw out the franchisees’ legal actions if they don’t amend their pleadings within 30 days by dropping many of their claims and providing some more details to back the allegations that remain.

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Unless the franchisees fix their pleadings in 30 days, “those pleadings shall be struck out in their entirety, without further leave to amend,“ Justice Morgan ruled on Oct. 22.

The often-public dispute between the Tim Horton’s Inc. franchisees and their parent company, Restaurant Brands International Inc., has largely gone quiet over the past two months because the two sides are trying to resolve their differences behind closed doors, industry sources said. The underlying disagreements focus on how much in costs the franchisees must shoulder as the company pursues new initiatives, such as renovating restaurants, to help pump up sluggish sales growth.

In the meantime, new executives at Tim Hortons are trying to strike a more conciliatory tone with franchisees, patch up the poor relations and restore some of the brand’s lost lustre.

RBI spokeswoman Jane Almeida said that it has always believed the legal actions were designed primarily for media attention, initiated last year “during a more difficult time in the relationship between Tim Hortons and a select group of franchisees."

“This latest court victory for Tim Hortons reaffirms that the lawsuits are lacking in merit and facts,” she said. She added that the company is working with its elected advisory board of restaurant owners and is optimistic about the future relationship with all franchisees. Dissident franchisees say that the advisory group has no real power and is simply a rubber stamp for corporate decisions.

Richard Quance, a lawyer at Himelfarb Proszanski LLP who represents the franchisees, said that while the judgment is a setback, he’s confident the cases will proceed with key issues intact. “It’s inconceivable we’re not going to deliver an amended statement of claim” by the deadline, he said.

In March of 2017, an unhappy group of franchisees formed the Great White North Franchisee Association (GWNFA) to challenge what many restaurant owners called excessive cost-cutting and corporate mismanagement that they said were hurting the Tim Hortons brand and franchisees’ profits.

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In June of that year, franchisee Mark Kuziora sought class-action status for a lawsuit, claiming RBI, its executives and its franchisor TDL Group were misusing the restaurant owners’ advertising money. Four months later in another legal action, two other franchisees − David Hughes, GWNFA president, and Mark Walker − sought class-action status, alleging the company, its executives and TDL were interfering with the franchisees’ right to associate.

By this summer, both Mr. Hughes and Mr. Kuziora, two of the most prominent franchisee rebels, had left the company after RBI negotiated settlements with each of them for undisclosed amounts. Mr. Kuziora had sued RBI in the spring after it had blocked the renewal of one of his two restaurant licences. Meanwhile, on the Labour Day weekend, RBI locked out Mr. Hughes from his four Alberta restaurants. Mr. Walker has now replaced Mr. Hughes as president of GWNFA, whose spokeswoman declined to comment for this story.

But even as meetings behind the scenes between Great White North and RBI continue, the legal cases are moving through the courts.

Legal experts said the latest judgment is a disappointment for the franchisees but the cases can still go ahead. However, the franchisees may have to pay the company heavy costs as part of the decision, they said.

“It’s a symbolic blow to the lawsuits’ optics and certainly to the momentum,” said Ben Hanuka, a franchise lawyer at Law Works.

But the lawsuits can still go forward, he said. “This is just the first battle. The next one, I suspect, is even going to be more difficult for them.” The franchisees still have to win certification for class-action status.

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Matthew Kelly, managing partner at consultancy Level5 Strategy Group, said the wrangling can become a big distraction for Tim Hortons in its efforts to improve its restaurants and customers’ experience amid heated competition.

Mr. Kelly, a former executive at Yum Brands Inc., which owns Pizza Hut, KFC and Taco Bell, said the spat can become a competitive disadvantage for Tim Hortons. “When you’re in an ultra-competitive, low-growth business like fast food, you really need everyone rowing in the same direction to compete with juggernauts like Starbucks and McDonald’s,” said Mr. Kelly, who has worked extensively with franchisees at Yum.

Justice Morgan said the franchisees’ claim of breach of contract can be sustained in both of the legal actions as well as claims of breach of duty regarding fair dealing in the right-to-associate action − as long as the franchisees amend their pleadings within 30 days and produce “particulars” to back some of the allegations.

The judge also struck out defendants RBI and a number of its executives, including chief executive officer Daniel Schwartz, in both cases but kept TDL Group, the franchisor that is owned by RBI, as the sole party that is being sued.

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